Tight Housing Market Boosts New York Office Conversions

New York real estate firms are increasingly converting office buildings into apartment complexes as an antidote to the city’s housing crunch, tapping into tax incentives also designed to increase the supply of affordable homes. Water Street in lower Manhattan has been a popular area for the makeovers, earning it the nickname “Conversion Alley,” with buildings offering a mix of luxury and affordably-priced apartments to qualify for municipal abatements.

“My belief is just about any building could be converted as residential,” Joey Chilelli, partner at real estate developer Vanbarton Group, told AFP during a tour of an office high-rise at 77 Water Street the firm is converting into a residential building.

The real estate retooling has reached celebrated structures such as the Flatiron Building near Madison Square Park, which is currently being converted. Real estate firms view the projects as less risky and quicker to implement than many new builds.

The movement comes as rental costs continue to drift higher. In April, the median rent of a Manhattan apartment topped $5,000 for the first time as the vacancy rate slipped to a six-year low of 1.55 percent.

By contrast, commercial real estate vacancies stood at 14.6 percent in the first quarter, reflecting a lingering impact from the pandemic period when remote working depleted downtown business districts.

Under the current policy, the city abates 90 percent of property taxes on conversions that set aside at least 25 percent of units as affordable housing. The affordable apartments may rent for around one-quarter of market rates, but otherwise look identical.

Such abatement policies have drawn interest from developers, along with a measure that expands the pool of qualifying buildings to those built before 1990 instead of 1961.

In Manhattan, more than 44 commercial buildings have been converted into residential ones between 2020 and 2024, resulting in nearly 18,000 new apartments. Real estate firm Cushman & Wakefield expects 31 conversions in 2026 compared with 18 in 2025 and nine in 2024.

In December 2022, former mayor Eric Adams set a target of adding 500,000 new apartments through 2030, while his successor Zohran Mamdani in April unveiled plans for another 200,000 new affordable homes.

Vanbarton began converting buildings in 2013 and currently manages more than 5,000 apartments.